The word “troubled” doesn’t even begin to describe the Teamsters’ Central States Pension Fund. “Desperate” is more like it. Last Friday, May 6, the Treasury Department announced that it had rejected a restructuring proposal submitted by plan trustees last September to avert collapse. The proposal, which would have cut benefits on average by 22 percent for about two-thirds of all participants, did not go over well with Teamsters General President James P. Hoffa and other union officials. Yet they are cornered by reality. As of last fall, liabilities exceeded assets by $17.5 billion, a gap widening by $2 billion a year. The plan is projected to go bankrupt in 10 years. A federal bailout likely would make things worse. Central States Executive Director Thomas Nyhan is reviewing alternatives.
Union Corruption Update covered this issue in detail last October. The Central States, Southeast and Southwest Areas Pension Fund, or simply the Central States Pension Fund, covers more than 400,000 active and future International Brotherhood of Teamsters retirees across 37 states. Then-Teamster General President Dave Beck and his heir, Jimmy Hoffa, established the fund in the mid-1950s. Though the fund was legally separate from the union, many union officials and business associates weren’t impressed. More than once, they used it as a personal bank. Hoffa, convicted on various corruption charges, would be sent packing to federal prison in 1967. In his absence, the fund functioned as a Mafia branch office, with an unusually large share of assets consisting of high-risk real estate loans. A Justice Department official noted in the mid-Seventies: “The thing that’s absolutely frightening is that through the Central States Pension Fund, the mob, quite literally, has complete access to nearly a billion dollars in union funds.” In 1982, following a lengthy federal probe, the Teamsters entered into a consent decree with the government to relinquish control of Central States to a consortium of institutional investors. While this arrangement remains in force, union-appointed trustees have continued to set much of Central States’ policy. And Teamsters-negotiated collective bargaining contracts have imposed enormous liabilities. As of last year, the fund was paying out $3.46 in benefits for each dollar it was collecting from employers. Even though plan assets have risen substantially since the 2008 stock market crash, liabilities have risen even faster.
To understand why the nation may be at risk, it is necessary to understand that the suburban Chicago-based Central States fund is a multiemployer pension plan. That is, unlike a single-employer retirement plan, it is funded by two or more employers. And being a defined-benefit investment, as opposed to a 401(k)-style defined-contribution investment, outside fiduciaries manage portfolios. The union and the employers each appoint members to the board of trustees. Currently there are about 40 million active and retired U.S. employees covered by a defined-benefit pension. About 30 million of them are enrolled in a single-employer plan; the remaining 10 million are enrolled in a multiemployer plan. The federal government protects each type through Pension Benefit Guaranty Corporation (PBGC), established by Congress in 1974 under the Employee Retirement Income Security Act. Ironically, the protector itself one day may need protection. And the Central States situation would have plenty to do with that.
Pension Benefit Guaranty Corp. operates as an insurance fund. As such, it uses premiums, not taxpayer-funded appropriations, to cover liabilities. If the U.S. Labor Department or PBGC project that assets are insufficent to cover future liabilities, in response the corporation may raise premiums, subject to congressional approval. Only a few years ago, in 2013, PBGC raised its per-person rate from $12 to $13. A mandate in the Multiemployer Pension Reform Act the following year dwarfed this, doubling the rate to $26 per person starting in 2015, with cost-of-living adjustments thereafter; the rate for 2016 is $27 (Take heart: The single-employer annual premium, given the higher beneficary payout limit, is now $64). Yet even that barely would make a dent in the crisis. With 10 million participants now paying $27 a year, revenues would be $270 million. That looks impressive, but in fact it is only one-half of 1 percent of the $52.3 billion asset-to-liability multiemployer shortfall at the close of fiscal year 2015, according to the fiscal year 2015 annual PBGC report. That’s up from $42.4 billion at the end of fiscal year 2014 and $8.3 billion at the end of fiscal year 2013. The multiemployer deficit in 2015 accounted for over two-thirds of the total $76.3 billion deficit.
Quite simply, multiemployer plan obligations, given present assumptions, are unsustainable. The deficit has become so large that no insurance premium hike can close it. If it is any comfort, the situation would be worse if the annual PBGC payout limit for multiemployer plans were set as high as for single-employer plans. Under a single-employer plan, the current maximum guaranteed benefit per retiree (starting at age 65) is $60,136, indexed for inflation. By contrast, under a multiemployer plan (based on years of service rather than age), the annual maximum benefit is only $12,870. And unlike single-employer plans, there is no indexing for inflation.
Pension Benefit Guaranty Corp. is headed toward collapse. And the Teamsters’ Central States fund would be a major reason. Central States fiduciaries are aware of this. They also are aware that the Multifamily Pension Reform Act of 2014 offers a backstop. That legislation, sponsored by Reps. John Kline, R-Minn., and (now-retired) George Miller, D-Calif., and signed by President Obama, authorizes managers of plans of “critical and declining” status to reduce benefits, either permanently or temporarily. “Critical” means that assets are less than 65 percent of projected long-term liabilities; “declining” means that the plan is projected to run out of money within 15 years, or in certain cases, 20 years. Any proposed benefit cut must receive approval from the U.S. Treasury Department. And the plan managers must notify participants of any such proposal in advance. If approved, plan participants must be given an opportunity to vote on it. And if current and future beneficiaries reject the proposal, the Treasury Department must permit benefit reductions for “systematically important” plans. The Central States fund, which is only about 50 percent-funded (i.e., total assets are only about 50 percent of total liabilities), surely qualifies as important.
The Central States Pension Fund, which now pays out more than $2.8 billion in benefits a year, last September 25 applied for relief under the Kline-Miller legislation. It was the first pension plan to do so. Its proposal would reduce pension checks for around two-thirds of the 400,000 beneficiaries on average by 22 percent and in some cases by at least 50 percent. Plan fiduciaries sent out letters to Teamster members informing them of the proposed changes to their plan. Teamster President Hoffa and other union leaders are bitterly opposed. Indeed, three days earlier, on September 22, Hoffa wrote a letter to the Treasury Department urging rejection. The restructuring proposal, he wrote, “unfairly shifts the consequences of unfunded pension liabilities to retirees, participants and beneficiaries by purporting to require a vote of retirees and other participants and beneficiaries that can then be simply ignored if a negative vote would cause significant liability to the Pension Benefit Guaranty Corporation.” Hoffa added: “(P)articipants and beneficiaries get to vote, but their vote only counts if they vote to cut their own pensions. The people who conceived that cynical scheme should be ashamed.” The Teamsters received support in its campaign from outside groups such as the American Association of Retired Persons and the Pension Rights Center. Sen. Elizabeth Warren, D-Mass., last month stood on the Capitol lawn to give an emotional speech lambasting plan administrators and affiliated investment bankers.
Yet plan managers, beginning with Executive Director Tom Nyhan, had no choice but to deliver bad news: The Central States Pension Fund, if continuing on its present course, will run out of money by 2026. As it is, the fund now was paying out $3.46 for each dollar collected from employers. Even with adoption of the proposal, noted Nyhan, the fund would have only a 50-50 chance of survival past the year 2064. Things actually could have been worse. Near the end of 2007, United Parcel Service made a $6.1 billion lump sum contribution to Central States in exchange for opting out of further participation. UPS management had seen the handwriting on the wall.
The Treasury Department, however, was not swayed. Last Friday, May 6, the department rejected the proposal. Kenneth Feinberg, the department’s special mediator, stated: “That specific plan submitted, pursuant to Kline-Miller, is flawed.” He based his decision on a Treasury memorandum issued 10 days earlier on April 26. The memo, more than 100 pages in length, spelled out guidelines for evaluating plan restructurings. In his rejection letter to Central States, Feinberg addressed three overriding questions: Did Central States exhaust all other alternatives? Are the benefit cuts equitable? Will those cuts preserve the fund? He emphasized that Central States’ estimate of a 7.5 percent annual investment return was too optimistic.
Teamster President James Hoffa defended the ruling, saying that it protects pensions for the “foreseeable future.” In an e-mail, Hoffa wrote that his union will work to find a solution to funding shortfalls to “allow members and retirees to continue to retire with dignity.” Such a view may be a morale-booster for rank and file, but it does nothing to put the Central States plan on sound footing. Central States Executive Director Thomas Nyhan, who supervised the preparation of the 8,000-page restructuring plan, makes this point. Nyhan stated: “We are disappointed with Treasury’s decision, as we believe the rescue plan provided the only realistic solution to avoiding insolvency.” He added: “If there was no legislation at any time, we’re going to end up in insolvency unless we have another plan.” Even Treasury Secretary Jack Lew is keeping a safe distance from his department’s ruling. In a letter to Congress, he wrote: “While we expect that this will come as a relief to these participants, our decision does not resolve the issues threatening their pension benefits. The Central States plan, like a number of other multiemployer plans, remains severely underfunded and is projected to become insolvent within the next 10 years.” And Joshua Gotbaum, who headed PBGC during 2010-14 before arriving at the Brookings Institution as a guest scholar, is also critical of the Treasury Department’s decision to reject the application. “I think this is a case of political cowardice,” Gotbaum said. “I am disappointed that Treasury chose to use its discretion under the law to undermine the purpose of the law. No one wants to admit that pension benefits have to be cut, and therefore, in public, no one wants to be seen as supporting anything that cuts benefits. However, unless some benefits are cut, all are cut.”
The larger issue extends beyond Central States. If fiduciaries and the Treasury Department cannot eventually come to terms, the fund faces collapse – and probably before 2026. There are a multitude of severely underfunded multiemployer pension plans. That many of them are required to manage “orphan” plans sponsored by now-bankrupt companies makes things even worse. A sharp stock market downturn of the sort we had eight years ago would depress asset-to-liability ratios further. Pension Benefit Guaranty Corporation’s multiemployer account is currently stretched to the limit; as of last September 30, total assets were less than 4 percent of long-term liabilities. Coverage of the Central States fund in the event of collapse would exhaust PBGC reserves. By contrast, the single-employer account was 78 percent-funded.
Major adjustments must be made soon if the Central States fund and Pension Benefit Guaranty Corp. are to avoid calamity. The fund is bleeding $5 million a day. Should it collapse, covering its obligations could topple PBGC. At that point, the political pressure favoring an agency bailout would be overwhelming. A better alternative is privatization. PBGC’s multiemployer pension program should be relaunched as a private insurance company that can charge premiums reflecting market standards of risk assessment. Such a move would be politically unpopular. But given the likely consequences of continuing to play by union rules, it also may be the most realistic. Even the Teamsters don’t have the luxury of waiting another decade.